Lecture 1: Course Overview and Review of Institutions and Markets
The goals of this class
Understand important financial institutions and markets
Provide a toolkit for creating portfolios of financial assets
Use
asset pricing models
to understand the trade-off between risk and return
Apply these models to:
identify investment opportunities
evaluate portfolio performance
Who am I?
Former research economist at the Federal Reserve Bank of New York (2015-2018)
PhD in economics at Harvard from 2009-2015
Research associate at the FRBNY (2007-2009)
Main research focus:
Consumer finance
– bankruptcy, mortgages, housing
Applied statistics
– machine learning and other methods
Email:
paul.goldsmith-pinkham@yale.edu
Please reach out if you have any concerns or questions re: policy that are not laid out in the syllabus.
Website:
paulgp.com
Timeline for our course
Part 1: Institutional details + setting the stage
What we’ll learn:
Who are the buyers and issuers of financial instruments?
Define assets + securities classes
How are financial assets traded?
How have these financial assets performed historically?
Strong focus on statistical properties and
data
Questions to consider:
Why do people + institutions trade assets?
Why do investments make money?
What is the goal of investments?
Timeline for our course
Part 2: Portfolio tools
What we’ll learn
How do we interpret observed returns?
Build to a model of returns
Three ingredients necessary for our models:
Defining risk appetite/aversion
Understanding mean‐variance trade-off
Allocating between risky and safe investments
Use models to construct a portfolio of risky investments
C
apital
A
sset
P
ricing
M
odel
A
rbitrage
P
ricing
T
heory / Factor Models
Questions to consider:
What is the goal of an investment portfolio?
What is risk? How do I quantify it (vs. return)?
What simplifications am I willing to assume?
Timeline for our course
Part 3: Critical evaluation of the tools
What we’ll learn
How consistent is CAPM with the data?
How consistent is the data with APT?
Markets are efficient? Or is it behavioral?
How should we use the models when there are market anomalies?
Active portfolio management
Treynor-Black / Black-Litterman
Robust Portfolio Management
Questions to consider:
Are my portfolio decisions intuitive?
What am I missing?
Timeline for our course
Part 4: Evaluate and attribute portfolio returns
What we’ll learn
CAPM / APT describe returns from a
passive
strategy (no skill required)
How should we evaluate active managers?
Portfolio evaluation techniques
answers:
“Did you beat your benchmark?”
Performance attribution
answers the question,
“
How
did you beat your benchmark?”
Timeline for our course
Part 5: Applications and alternative forms of investing
What are other investment settings?
Private equity and hedge funds
International investing
Fixed income (bonds)
Derivatives (options, forwards, futures)
Key focus:
What changes when you shift markets?
Class requirements
Quizzes at beginning of each class
(on phone/laptop)
Two problem sets as homework:
Due February 17 and March 7
To be done individually
One case write-ups:
Yale University Investments Office (Due in class April 4)
To be done in groups 3-5
Exams:
Final exam
No midterm
TA: Prakhar Rustagi